Accounting treatment for free of cost (foc) sales.

This query is : Resolved 

30 November 2011

Dear Sir,

I Shaik Asif, working as a Assistant Manager Finance and Admin in International Beverage and Filling Industries, Sharjah, UAE.

Our company is producing Juices and Carbonated drinks and selling through 30 salesmen and also exporting to various companies. Our company marketing policy is if any customer orders 10 cases (24 juice 250 ml bottles) then one case will be given as free of cost(FOC) to that customer.

That FOC sale will be recording as Promotional and Marketing expenses in our records (only cost price of FOC).

Is the above accounting treatment correct. If not please provide me the correct treatment with reference to any Accounting standard or any Generally Accepted accounting principles.

ACMA Obulirajan R (Expert)
30 November 2011

Yes it is correct... Free of cost should be expensed as sales promotion expenditure at the cost of the product.

CA. Asif Shaik (Querist)
30 November 2011

Dear Mr. Obulirajan R,
Thanks for your early reply. But we have another option that selling price shall be averaged to total number of cases sold. For Ex: 100 cases total value is Rs. 1000 and 10 cases will be given as free of cost. then each case selling price will be rs.1000/110 cases = rs. 9.09 per case.
The above treatment is correct or wrong? But the sales manager is not agreeing the above treatment because selling price is decreasing and he is accountable for lower selling price.
Please suggest me sir.
Asif Shaik,
Chartered Accountant,

Devinder Jain (Expert)
07 February 2014

The extra cases are not to treated as free of cost, but as turnover discount. Treating the extras foc may lead to the revenue authorities denying input tax credits. The extras are not advertising/promotional expenses but are discount on bulk supplies/sales.

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